Picking the winners

Ashvin Parekh, Pratip Chaudhuri, G N Bajpai and Pradip P Shah
GN Bajpai, chairman of the four-member Jury to select the Business Standard Fund Managers of the year, summed up the over two-hour long discussions, by saying that "a flash of a performance certainly does not entitle an individual to an award. It must be consistency". The other criteria that the Jury members looked at during their over two-hour long discussions was the quality of the portfolio which does not carry unnecessary risks.

That was the reason why the Jury took a close look at the Sharpe ratio, which measures the return for every unit of risk taken and is a better way to measure a fund's performance rather than looking at absolute returns. The adjusted Sharpe ratio is a step forward as it takes into account the total assets managed by a fund manager (across all schemes in the respective category) in relation to the total assets of the category.

In short, a ranking based on the weighted average Sharpe reflects the difficulty of yielding superior returns taking into account the asset size and the performance of all the schemes managed by a fund manager. The 91 days Treasury bills' average return during the 12 months period was considered as the risk-free return for both, equity and debt funds. This was to ensure that fund managers taking risk were appropriately rewarded.

It's not a surprise that the adjusted Sharpe ratio achieved by the winners was way ahead of the second best in their respective categories, which reflects the superior risk-adjusted returns they have delivered during this period.

The task of picking the winners was an onerous one for the Jury, given the fact that the market has been volatile, both for money managers as well as investors. Consider this: In 2013 alone, the BSE Sensex crossed 20,000 on three occasions (in January, May and July), but after touching this psychological mark it fell to almost 18,000 levels on two occasions (in April and June) and to an intra-day low of 17,449 in end-of-August. Though it has again scaled over 20,000 and is holding turf, the volatility is far from over. And, after all this, the net gain for the Sensex is a mere 3.3 per cent. What's worse is that even as the Sensex is near its all-time high currently, more than half the stocks haven't seen significant participation in the rally.

India Inc, too, has experienced tough times with earnings growth decelerating, demand for goods diminishing, high interest costs, sharp swings in the rupee and huge debt. It goes without doubt that equity fund managers have had a very difficult task in predicting share price trends. For debt fund managers, too, the situation was equally tough. While the Reserve Bank of India lowered policy (repo) rate thrice between January-May 2013 signalling an easy monetary policy, the central bank had to hike the rate again thereafter on exodus of foreign capital from the country, which had led to the rupee's sharpest fall versus the US Dollar in decades. The domestic liquidity scenario also worsened with short term rates and yields rising.

During this period, from nearly 9 per cent, G-Sec yields fell to as low as 7 per cent and have now rebounded to over 9 per cent. Gold prices, too, were volatile. It fell from about Rs 32,000 per 10 grams and to as low as Rs 25,000 only to rebound to almost Rs 33,000 levels (now still over Rs 30,000), influenced by fall in sharp swings in the Rupee, fall in international prices and imposition of gold-specific norms by the RBI and higher import duties by the government (the latter two was with an aim to cut gold imports and consequently lower the pressure on Current Account Deficit).

It would be an understatement to say that retail investors didn't feel the heat considering that many equity fund managers found it difficult to beat benchmark indices while debt fund managers (excluding liquid and ultra-short-term funds) during certain months ended up with negative returns i.e. a fall in the net asset value of their schemes. For some investors, it was difficult to digest how they could lose money in debt schemes; but, that's how markets behave. Even money kept in bank fixed deposits has failed to yield positive 'real' returns given that consumer inflation has been high, most in near double-digits. Investors, too, have felt the shocks with very fewer options to park/invest money.

It is in this background that the Jury members analysed the parameters used to rank the fund managers in each of the categories. After being convinced on the ranking parameters, they sought finer details, including those on absolute fund returns, standard deviation and the adjusted Sharpe ratio. Also, as suggested by the Jury last year, a threshold limit in terms of fund size was also fixed before calculating the rankings. Accordingly, funds (in each category) whose average corpus was less than 10 per cent of the average category corpus were excluded.

The data was provided by ICRAOnline. A composite score was ascertained for each fund manager comprising of the weighted average of the Sharpe ratio achieved by each scheme managed by him/her. The average one year corpus (based on month-end figures) of each scheme managed was used as weights to arrive at his/her score.

There are other factors that make one year returns equally important. For example, just because the three year returns are good, investing in a fund may not be prudent if the recent returns are languishing, said another jury member.

Given this, the market conditions and that only select themes/companies did well, the jury members said that this is where the alertness of a fund manager - his judgment - counts.

The Jury analysed the data to arrive at the winners.

The two fund managers who walked away with the awards through majority opinion are S Naren and Mittul Kalawadia of ICICI Prudential AMC in the equity category and Sachin Padwal-Desai and Umesh Sharma of Franklin Templeton Mutual Fund in the debt category. While Naren and Kalawadia jointly managed two equity funds, Padwal-Desai and Sharma jointly managed five debt funds.

The superior performance of their funds helped the fund managers bag the awards. While the combined average corpus of the two funds managed by Naren and Kalawadia stood at Rs 2,721 crore, the same was Rs 11,019 crore for Padwal-Desai and Sharma.